Building Barriers

The world is hungry for Canada. At least that's what the statistics on foreign direct investment suggest. In 2006 alone Canada witnessed an influx of nearly $450 billion in foreign investment, up about $40 billion from the year before. And though the numbers aren't in yet, 2007 looks like it might be Canada's best year yet.

But all this foreign investment has some Canadians worried about risks to their national security. What concerns them the most are acquisitions orchestrated by state-owned foreign entities. Driving the fear are suspicions that these entities aren't disclosing their intent behind the acquisition targets--many of which have involved Canadian energy and mining companies.

Leading the charge on this front is Canada's Minister of Industry Jim Prentice, who oversees foreign investment deals. In an October speech before the Vancouver Board of Trade, Prentice called for regulations that would raise the level of scrutiny on some foreign takeover bids. "I will examine the need for guidelines on takeovers by state-owned enterprises," he said.

Most experts now believe it's inevitable that Canada will pass some kind of law in 2008 to address Prentice's concerns. Nobody, though, knows what the final legislation will look like.

"The view of the legal community in Canada is that no one wants to go backward by putting more restrictions on foreign investment so that we look protectionist," says Michelle Lally, partner at Osler, Hoskin & Harcourt in Toronto. "The exception to that is this whole issue that has arisen regarding foreign takeovers by foreign state-owned enterprises."

Fear of Foreigners
Canada currently has no laws on the books that restrict foreign state-owned enterprises or foreign companies from acquiring Canadian companies based on national security concerns.

The only authority the Canadian government has to restrict foreign investment is through the Investment Canada Act. Under this law the government can
scrutinize deals involving a foreign acquirer to determine whether they provide a "net benefit" to Canada.

"What comprises a net benefit is really very general economic criteria such as positive effects on employment," says Julie Soloway, associate at Blakes, Cassels & Graydon in Toronto. "No investment under that statute has ever been rejected."

But now Canadians are rethinking the safety of such an open-door policy--especially when it comes to foreign state-owned companies.
"People are concerned that they might have noncommercial objectives, which then leads to scrutiny over the transparency and reporting standards of such deals," Soloway says.

Deals involving China are garnering the most attention. With a population topping a billion and a quickly ballooning economy, China has aggressively hunted for natural resources beyond its borders. One of its prime targets recently has been Canada.

China's interest in Canada began in 2004 when China Minmetals, a state-owned metal producer, tried to acquire Noranda Inc., a nickel and zinc mining company, for $7 billion. That deal caused a wave of concern that a crucial segment of Canada's resources would fall under foreign control. That concern eventually resulted in the deal's demise. Since then, there have been numerous Chinese investments in Canada, most notably in Canada's rich oil deposits, where China's three state-owned oil giants--Sinopec, the China National Petroleum Corp. and China National Offshore Oil Corp.--all hold some ownership.

"When China was poised to buy Noranda, everyone ran around like the sky was falling," says Finn Poschmann, director of research at the C.D. Howe Institute, an independent Canadian public policy think tank. "That was Canada's wake-up call."

Hollowing Out
National security isn't Canada's only concern, though. Some Canadian executives are worried this fast-paced foreign investment environment could lead to what they have dubbed a "hollowing out."

"When people mention the 'hollowing out' effect, they mean they're worried that foreign investors will buy Canadian companies and take the head offices and all that goes with the head offices, including accounting, legal and high-level jobs, and take that abroad," Soloway says.

Most experts say these concerns are baseless. Statistically foreign investment in Canada has had no negative effect on the number of domestic high-level positions. Still, Canada's top CEOs are establishing a game plan just in case.

In October the Canadian Council of Chief Executives released the results of its six-month review of Canada's marketplace, concluding that whether or not the "hollowing out" effect is real, the Canadian government must act to keep high-level managerial jobs in Canada.

"Our work on the mergers and acquisitions issue suggests that the federal government's competitiveness strategy should emphasize three policy priorities," said Thomas d'Aquino, CCCE's CEO, in October in a statement. "Canada needs significant tax cuts for people and business. We need a thoughtful and thorough review of competition policy and foreign investment rules. And we must redouble efforts to strengthen our relationship with the United States in order to keep our shared border open and efficient."

There's a chance Canada's government may heed some of these recommendations. In July Maxime Bernier, minister of foreign affairs, and Jim Flaherty, minister of finance, compiled a panel of experts to review possible changes to the Investment Canada Act and Competition Act. "The [Competition Policy Review Panel] wants to determine the extent to which the laws are working and whether they need to be brought up to date," Soloway says. "It doesn't have the power to revise the laws, but it can issue recommendations."

Little Change
Whatever new regulations Canada's government decides to implement to give the government more oversight of foreign investments, most experts say these new laws or any changes to existing law will have little effect on U.S. companies.

"Practically speaking this will not have a tremendous impact on U.S. companies because they are not state-owned authorities," Soloway says.

"Also, a lot of our foreign investment comes from the U.S., and I can't imagine that would raise any kind of national security concerns."

The government will likely announce specifics about the new regulations within the next couple months. Until then, foreign investors shouldn't worry too much.

"It might seem like Canada is trying to establish new barriers to investment, but for a huge majority of investors this is not going to be a big issue," Soloway says. "Canada is very much open for -business."